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Herding And Contrarian Behaviour In Financial Markets

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Executive Summary

Rational herd behavior and informationally efficient security prices have long been considered to be mutually exclusive but for exceptional cases. In this paper, the authors describe the conditions on the underlying information structure that is necessary and sufficient for informational herding and contrarianism. In a standard sequential security trading model, subject to sufficient noise trading, people herd if and only if, loosely, their information is sufficiently dispersed so that they consider extreme outcomes more likely than moderate ones.

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